Turkey central bank surprises markets with big rate hike

Irving Hamilton
September 14, 2018

"It nearly seems like it's a game of "good cop, bad cop" being played out between the Turkish authorities - with President Erdogan on the one hand still making statements regarding his dislike of interest rates and. a very sizeable reaction from the central bank in response to the recent inflationary and geopolitical developments", she said.

He's delivered on that pledge, ousting the old guard of policy makers who'd guided the economy since 2002 and giving himself the sole authority to make appointments at the central bank and other state organizations.

The lira reacted strongly to the decision, rising by five percent to the USA dollar.

The bank's decision came shortly after Erdogan triggered tumult by repeating his hostility to higher borrowing costs and issuing an order that limited the use of foreign currency in domestic transactions. And on the morning of the rate hike decision, Erdogan was busy.

The magnitude of the hike was all the more surprising given that just before the decision Erdogan had slammed interest rates as a "tool of exploitation".

Currently, the interest rates are below the annual inflation level in Turkey. "If you say "inflation is cause, the rate is the result", you do not know this business, friend", he added.

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Erdogan accused the central bank of failing to control inflation, now standing at 18 percent, and again aired his unorthodox view that low rates bring inflation down.

It was not immediately clear if Erdogan had been aware of the central bank's decision when he made his comments.

The dollar/lira exchange rate fell 6.3512 by around 14.30 local time (1130 GMT), down 1 percent.

Erdogan took over as Turkey's first executive president in July with sweeping new powers, including oversight over economic policy and the ability to appoint the central bank governor.

The rate rise comes on the same day as the Bank of England left the interest rate untouched at 0.75%, citing heightened risks to global growth as a result of volatility within emerging markets, as well as tensions between the United States and China. The sense of doom was compounded on August 1, when the USA imposed selective sanctions on Turkey over the detainment of an American pastor.

"Erdogan's comments clearly show that he does not support this and it becomes much more hard, if not impossible, for the Turkish central bank to tighten enough to stabilize the lira and get inflation under control", Esther Reichelt, a forex strategist at Commerzbank in Frankfurt, told DW.

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